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IRS ruling could boost community solar

John David Baldwin

November 8, 2015

Community solar in the U.S. is flourishing as never before. An important new ruling by the IRS may serve to accelerate this growth. Homeowners are eligible for a 30% federal investment tax credit (ITC) for solar installed on their roofs, under IRS Section 25D. This credit was understood to only be available for rooftop solar owners. But, a recent IRS ruling found that the owner of an offsite solar array could also be eligible for this credit. The IRS ruled that Roland Marx, a co-founder and member of Vermont’s Boardman Hill Solar Farm, is eligible for the ITC. This is despite the fact that the energy his system generates comes from a remote solar array and not from his roof. This ruling could have a serious impact on the speed at which projects like the Boardman Hill Solar Farm develop. To understand why, it is necessary to understand how Mr. Marx’s solar ownership works.

Boardman Hill Solar Farm

The story began when Roland Marx and Marcy Tanger of Mount Holly, Vermont, a green strategic planner and a community organizer, respectively, conceived of the idea of a local solar farm. The pair held a town meeting to introduce the concept at which 56 people showed up. The reaction was “overwhelmingly positive” (according to this case study), and about 30 households eventually signed up.

However, the group needed a site and an installer. They began by creating a limited liability company to handle everything not related to the actual solar hardware (insurance, taxes and other financial matters, maintenance, etc.). They found a site to lease belonging to a local farmer. The farmer stipulated that the group could not pay for the lease by selling renewable energy credits. The group reached a compromise whereby the farmer would receive credits from his utility on his electric bill equal to 5% of the system’s output.

The local utility, Green Mountain Power, purchases electricity from the project with a 6¢/watt adder. This is then credited to Solar Farm members on their monthly electric bill through net metering. The net metering credit for each member is calculated as a percentage of the output of the total array, based on the number of panels the individual purchased, compared to the total number of panels in the array. (Net metering credits may not be in excess of the cost of total electricity consumption by that member’s household.) The solar farm members own the individual panels themselves. This was an important factor in the government’s ruling.

The complete array for Boardman Hill Solar Farm is 150 kW (187.88 kW DC). The total cost for construction was $512,000. The base price per watt for the members was thus $2.73. The price of leasing the land added $.14 to the cost per watt for members, for a total of $2.87/watt, which Marx claims is the lowest price for community solar in the state of Vermont.

Now that the government has ruled in his favor, Marx, who received a filing extension on his 2014 tax return because of this issue, is preparing to file. As he paid $8,746 for his panels, and the ITC would be equal to 30 percent of that total, he will presumably receive a credit of about $2,624.

CESA and the IRS

These additional savings wouldn’t have happened without the work of the Clean Energy States Alliance (CESA). The organization is engaged in a project to reduce solar soft costs (costs not related to the construction of the actual hardware of a solar array) in New England. It became interested in the tax credit issue. The organization spoke with partners in the solar industry and others, but there was great uncertainty as to whether community solar owners were eligible for the Section 25D ITC. CESA then asked the IRS directly for broad guidance on the issue. The IRS responded that they didn’t have the resources to deal with the issue and were not interested in doing so. This is possibly because the ITC is set to expire at end of 2016.

CESA instead elected to obtain a private letter ruling (PLR) on the subject. A PLR is a written decision in response to a request by a taxpayer for guidance as to the tax consequences of a particular transaction. The organization wanted something in writing from the IRS to show that the government did not take the narrow view that Section 25D applied only to sole ownership (i.e., rooftop solar). CESA decided to underwrite Mr. Marx’ letter to the IRS, which asked for a ruling on the ITC in his case.

Implications of the IRS Ruling

By law, a PLR cannot be used as a legal precedent for future IRS rulings. However, Nate Hausman, project manager at CESA, told CPN, “We think the ruling may have implications for community-shared solar projects that mirror the structure of the project at issue in the ruling.” He cautions, however, that similar groups should consult their tax professional before applying to the IRS for the credit.

Nicola Lemay, chair of the tax department at Foley Hoag, a firm CESA hired to help with Mr. Marx’s filing, was quoted in this article as saying, “Although, by law, this letter ruling cannot be used or cited as precedent by other taxpayers, several cases acknowledge that a private letter ruling can be used as ‘persuasive authority’ or an ‘instructive tool.’”

In a webinar in which Lemay was one of the presenters, she confirmed, in response to a question, that there exists no precedent that would allow someone to take both the business tax credit (under Section 48, the “energy credit”) and the residential credit (under Section 25D). She also pointed out that the PLR might not apply in situations in which solar panels are owned jointly. In Marx’ case, each panel in the array had one, and only one, owner. She also indicated that if Congress extended the ITC past the end of 2016, it is possible that the IRS might issue a wider ruling on this subject.

Adam Wade, of the Energy, Cleantech and Renewables department of Foley Hoag, said, during the same webinar, that the PLR process was a “great example of how the community can work [with] different groups and representatives to coordinate state and federal policy."